[Federal Register Volume 70, Number 236 (Friday, December 9, 2005)]
[Rules and Regulations]
[Pages 73344-73345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23843]



[[Page 73343]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 231, 241, and 271



Commission Guidance Regarding Accounting for Sales of Vaccines and 
Bioterror Countermeasures to the Federal Government for Placement Into 
the Pediatric Vaccine Stockpile or the Strategic National Stockpile; 
Final Rule

  Federal Register / Vol. 70, No. 236 / Friday, December 9, 2005 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 231, 241, and 271

[Release Nos. 33-8642; 34-52885; IC-27178]


Commission Guidance Regarding Accounting for Sales of Vaccines 
and Bioterror Countermeasures to the Federal Government for Placement 
Into the Pediatric Vaccine Stockpile or the Strategic National 
Stockpile

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: The Securities and Exchange Commission (Commission) is 
publishing this interpretive release with respect to accounting for 
sales of vaccines and bioterror countermeasures to the Federal 
government for placement into stockpiles related to the Vaccines for 
Children Program or the Strategic National Stockpile.

DATES: Effective: December 5, 2005.

FOR FURTHER INFORMATION CONTACT: Shelly C. Luisi, Senior Associate 
Chief Accountant or G. Anthony Lopez, Associate Chief Accountant, both 
of the Office of the Chief Accountant, at (202) 551-5300, [email protected], 
U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, 
DC 20549-6561.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission is committed to addressing any unintended 
consequences of accounting requirements that could impair the nation's 
ability to create and maintain sufficient supplies of various vaccines 
and bioterror countermeasures (vaccines). The Commission is aware that 
questions have been raised about the timing of the vaccine 
manufacturers' revenue recognition for vaccines placed into stockpiles 
related to the Vaccines for Children Program and the Strategic National 
Stockpile. Additionally, concerns have been expressed that Commission 
guidance, which may require revenue recognition to be delayed beyond 
the period in which the vaccine is placed in the stockpile in some 
circumstances, may have the unintended consequence of causing some 
vaccine manufacturers to decline to participate in these critical 
stockpile programs. Although the Commission is not aware of any 
instance to date of a vaccine manufacturer declining to participate in 
these programs based on the resulting accounting, the Commission is 
publishing this guidance to remove the accounting questions from the 
debate.
    Government vaccine stockpile programs are unique in many respects. 
For example, the primary objective of purchasing the vaccines is not to 
take delivery but rather to be able to require delivery on a moment's 
notice. The hope of both parties to these contracts is that the 
vaccines will never be needed and thus never delivered. Another unique 
characteristic of vaccine stockpile programs is the critical public 
policy objective of safeguarding the public health in the event of 
potentially catastrophic disease outbreaks. An additional unusual 
characteristic of vaccine stockpiles is the need for rotation of the 
stockpile due to limited shelf life. For these and other reasons, the 
Commission limits this guidance to the vaccines enumerated below 
(enumerated vaccines).

II. The Application of Generally Accepted Accounting Principles for 
Revenue Recognition to Vaccine Stockpiles

    The Commission historically has recognized pronouncements of the 
Financial Accounting Standards Board (FASB) as authoritative in the 
absence of any contrary determination by the Commission.\1\ More 
recently, in Financial Reporting Release No. 70,\2\ the Commission 
announced its determination that the FASB and its parent organization, 
the Financial Accounting Foundation, satisfied the criteria in section 
108 of the Sarbanes-Oxley Act of 2002 \3\ and section 19(b) of the 
Securities Act of 1933 \4\ and, accordingly, FASB's financial 
accounting and reporting standards are recognized as ``generally 
accepted'' for purposes of the Federal securities laws. As a result, 
registrants are required to comply with those standards in preparing 
financial statements filed with the Commission, unless the Commission 
provides otherwise.\5\
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    \1\ Rule 4-01(a)(1) of Regulation S-X, 17 CFR 210.4-01(a)(1). 
See Accounting Series Release (``ASR'') No. 150 (December 20, 1973) 
and ASR No. 4 (April 25, 1938).
    \2\ Release Nos. 33-8221; 34-47743; IC-26028; FR-70 (April 25, 
2003) (``FR-70''); 68 FR 23333 (May 1, 2003).
    \3\ 15 U.S.C. 7218.
    \4\ 15 U.S.C. 77s(b).
    \5\ See FR-70; Rule 4-01(a)(1) of Regulation S-X, 17 CFR 210.4-
01(a)(1).
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    Although no specific guidance has been published by the FASB 
related to revenue recognition for vaccine stockpiles, general criteria 
for revenue recognition are discussed in the FASB's Concepts 
Statements. Statement of Financial Accounting Concepts No. 5, 
Recognition and Measurement in Financial Statements of Business 
Enterprises (Concepts Statement 5) identifies two criteria necessary 
for revenue recognition: the revenue must be realized or realizable and 
earned.\6\ Concepts Statement 5 goes on to explain that ``revenues are 
considered to have been earned when the entity has substantially 
accomplished what it must do to be entitled to the benefits represented 
by the revenues'' \7\ and that the two conditions for revenue 
recognition are ``usually met by the time product or merchandise is 
delivered. * * *'' \8\
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    \6\ See Concepts Statement 5, ] 83 (a) and (b).
    \7\ Concepts Statement 5, ] 83(b).
    \8\ Concepts Statement 5, ] 84(a).
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    In 1986, in Securities Exchange Act Release No. 23507 and 
Accounting and Auditing Enforcement Release No. 108, In the Matter of 
Stewart Parness (AAER 108), the Commission set forth criteria to be met 
in order to recognize revenue when delivery has not occurred.\9\ Of the 
seven criteria AAER 108 set forth as necessary for revenue recognition 
in the absence of delivery (commonly referred to as ``bill and hold''), 
transfers of vaccines to government stockpiles sometimes do not satisfy 
the following two:
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    \9\ See In the Matter of Stewart Parness, AAER 108 (August 5, 
1986). The Commission staff reiterated this guidance in Staff 
Accounting Bulletin (SAB) Topic 13 in 1999 through the issuance of 
SAB 101.
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     There must be a fixed schedule for delivery of the goods; 
and
     The ordered goods must have been segregated from the 
seller's inventory and not be subject to being used to fill other 
orders.\10\
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    \10\ See SAB Topic 13. A. 3 and AAER 108.
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III. Current Commission Guidance

    Notwithstanding the Commission's previous guidance discussed above, 
the Commission will not object if vaccine manufacturers recognize 
revenue from the sale of enumerated vaccines related to Federal 
governmental stockpile programs if the arrangements meet the applicable 
revenue recognition criteria specified under generally accepted 
accounting principles and Commission rules and regulations, other than 
for the requirements associated with product delivery and inventory 
segregation noted above, so long as disclosures are provided that allow 
for a clear understanding by investors of the subject transactions, the 
related accounting, and the effect of this alternative accounting 
method in the financial statements.
    The following vaccines are subject to this Release when sold to the 
Federal

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government for purposes of placing the vaccines into a Federal 
governmental vaccine stockpile (enumerated vaccines):
     Childhood disease vaccines;
     Influenza vaccines; and
     Other vaccines and countermeasures sold to the Federal 
government for placement in the Strategic National Stockpile.
    The Commission would not object if a registrant that sells 
enumerated vaccines elects this alternative accounting method beginning 
in the first fiscal quarter of the registrant's next fiscal year. If 
elected, the change in accounting represents a change in accounting 
principle under FASB Statement No. 154, Accounting Changes and Error 
Corrections. No preferability letter would be required if an accounting 
change is made solely in response to the adoption of the alternative 
method described above.
    Any financial statements filed with the Commission before adoption 
of the provisions of this announcement would be subject to the 
disclosure provisions of SAB Topic 11-M, Disclosure of the Impact That 
Recently Issued Accounting Standards Will Have on the Financial 
Statements of a Registrant When Adopted in a Future Period.
    Due to the uniqueness of the vaccine stockpile programs as 
discussed above, the alternative method is available only to the sales 
of enumerated vaccines by vaccine manufacturers and may not be extended 
by analogy to other circumstances.

IV. Financial Statement and Other Disclosures

    If the alternative accounting method is elected, the Commission 
believes that sufficient disclosures should be provided to allow for a 
clear understanding by investors of the subject transactions, related 
accounting, and the effect of the alternative accounting method in the 
financial statements. The following disclosures should be considered:
    A. Material terms and conditions of contracts for which the 
alternative accounting method was selected, including all fees received 
and a description of each enumerated vaccine product that the vaccine 
manufacturer sells to vaccine stockpiles. The vaccine manufacturer 
should also describe the nature of its continuing involvement with the 
stockpiles for enumerated vaccine products for which revenue has been 
recognized, such as stock rotation. Additionally, the election of this 
alternative form of revenue recognition would generally be a 
significant accounting policy under APB Opinion No. 22, Disclosure of 
Accounting Policies. Vaccine manufacturers should clearly disclose that 
this alternative policy applies only to enumerated vaccine product 
sales.
    B. Disclosures quantifying the effects of using the alternative 
policy on relevant balance sheet and income statement captions, 
including revenue, cost of sales, inventory and deferred revenue.
    C. Supplemental disclosure of the market value of inventory 
available to be rotated out of vaccine stockpiles and of sales to third 
parties that were filled from vaccine stockpiles.
    D. Supplemental disclosure of enumerated vaccine product quantities 
and related product sales revenue for enumerated vaccines actually 
delivered from stockpiles to the CDC or other party for use during the 
period (i.e., delivered out of stockpiles).

List of Subjects in 17 CFR Parts 231, 241, and 271

    Securities.

Amendments to the Code of Federal Regulations

0
For the reasons set out in the preamble, the Commission is amending 
Title 17, chapter II of the Code of Federal Regulations as set forth 
below:

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
Part 231 is amended by adding Release No. 33-8642 and the release date 
of December 5, 2005 to the list of interpretive releases.

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
Part 241 is amended by adding Release No. 34-52885 and the release date 
of December 5, 2005 to the list of interpretive releases.

PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
Part 271 is amended by adding Release No. IC-27178 and the release date 
of December 5, 2005 to the list of interpretive releases.

    By the Commission.

    Dated: December 5, 2005.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-23843 Filed 12-8-05; 8:45 am]
BILLING CODE 8010-01-P